Is Coreline Soft (KOSDAQ:384470) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Coreline Soft Co., Ltd. (KOSDAQ:384470) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Coreline Soft

What Is Coreline Soft's Net Debt?

As you can see below, at the end of September 2024, Coreline Soft had ₩10.4b of debt, up from ₩1.38b a year ago. Click the image for more detail. However, it does have ₩12.9b in cash offsetting this, leading to net cash of ₩2.47b.

A Look At Coreline Soft's Liabilities

We can see from the most recent balance sheet that Coreline Soft had liabilities of ₩2.90b falling due within a year, and liabilities of ₩17.0b due beyond that. On the other hand, it had cash of ₩12.9b and ₩1.45b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩5.51b.

Of course, Coreline Soft has a market capitalization of ₩80.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Coreline Soft also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Coreline Soft's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Coreline Soft reported revenue of ₩4.3b, which is a gain of 4.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Coreline Soft?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Coreline Soft lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩11b of cash and made a loss of ₩12b. But at least it has ₩2.47b on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Coreline Soft (1 can't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.